MEASURING A NATION'S INCOME
Monday, March 7, 2022
9:39 AM
Exercise 5
a.
Year
1. GDP is the market value of all final goods
• Value of Final good of firm A: $100 - $25 = $75.00 (because $25 is the revenue for
intermediate good. GDP only includes final goods and $25 has been included in the
cost of producing the final goods. Therefore, we have to minus $25 or you will
calculate the number twice).
• Value of final good of firm B = $130
→ GDP = value of final good of firm A + value of final good of firm B = $130 +
$75 = $205.00
2. GDP measures to things: the total income of everyone in the economy and the
total expenditure of the output produced
• GDP = total wage + total profit = ($20 +$30) + ($80 + $75) = $205.00
200
200
100
2017
400
400
100
2018
800
400
200
c. The economic well-being increase more in 2017
During the period of 2017-2018, there is no changes in real GDP (just the price)
During the period of 2017-2017, real GDP increases by 100 reflecting a increase
in economic well-being
Exercise 6
Year
Nominal GDP Real GDP GDP deflator
1
12
12
100
2
20
16
125
3
30
20
150
d. 25%
e. 20
3. GDP = $100 + ($130-$25) = $205.00
I. Definition
• GDP = Households + Firms + Government + Foreigners
1. The economy's income and expenditure
• GDP measures two things at once: the total income of everyone in the economy and the
total expenditure on the economy's output of goods and services.
- Income = Expenditure (every spending of some buyers is the income for some sellers)
→ GDP includes the buyers and sellers transactional money.
- GDP measures the flow of money (the circular-flow diagram)
2. The measurement of GDP
• GDP is the market value of all the final goods and services produced within a country in a
given period of time.
a. "GDP is the market value"
- Different kinds of products → a single measure of the economic activity
- Using the market prices
b. "of All"
- Including all items produced in the economy and sold legally, excluding items produced
and sold illegally.
c. "Final"
- Intermediate good is what devotes in the process of making the final goods → the factors
of production.
The value of intermediate goods has already included in the price of the final goods.
Being sold in the market for re-sale or for production.
- Final goods produced only for purchasing (the final products that are sold at stores for
using)
d. "Goods and services"
- All transactions that money are included and paid
e. "Produced"
- GDP includes goods and services currently produced
- It excludes the transactions happening in the past.
f. "Within a country"
- Products that are produced domestically, regardless of the nationality of the producer.
(VD: Samsung products are produced in Vietnam)
g. "In a given period of time"
- GDP measures the value of production that takes place within a specific interval of time
- Seasonal adjustments = The reports provided by the government to present the GDP
statistics.
MACROECONOMICS Page 1
Nominal GDP Real GDP GDP deflator
2016
g. "In a given period of time"
- GDP measures the value of production that takes place within a specific interval of time
- Seasonal adjustments = The reports provided by the government to present the GDP
statistics.
II. The components of GDP
III. Real versus Nominal GDP
1. Definition
• Real GDP: the production of goods and services valued at constant price (based on the
price of any year = base year)
- Calculating the GDP growth rate (how economy's overall production changes over time)
- Not affected by the change in price → reflecting the changes in the amounts being
produced.
- The prices in the base year provide the basis for comparing quantities in different years.
• Nominal GDP: the production of goods and services valued at current price
2.
-
The GDP deflator
Reflecting only the prices of the goods and services
The GDP deflator for the base year always equal 100
Measuring the current level of prices relative to the level of prices in the base year.
+ The quantities produced rise over time but prices remain the same
→ Nominal and Real GDP rise at the same rate → GDP deflator is constant
+ Nominal GDP rises but real GDP is constant
→ GDP deflator rises
• Calculate the inflation rate using the GDP deflator
IV. Is GDP a good measure of economic well-being
- GDP measures our ability to obtain many of the inputs for worthwhile life
- GDP is not a perfect measure of well-being
+ leisure:
people spend more time on working → GDP rises
However, they will spend less time on enjoying the goods and services produced (means
the Consumption group that is included in GDP) → GDP decreases
+ The value of goods and services produced at home and voluntary activities
+ The quality of environment
Government erases all environmental regulations → fims produce freely and GDP rises →
the well-being falls
The deterioration in the quality of air offsets he gains from greater production (production
of agricultural, for instance)
+ The distribution of income
Telling GDP per person on average of the total but does not tell the situation of each (the
personal experiences)
MACROECONOMICS Page 2
MEASURING THE COST OF LIVING
Tuesday, March 15, 2022
2:08 PM
I. Definition
• Basket of goods:
- a fixed set of consumer products and services, the prices of which are used to measure a
nation's rate of inflation. The basket's price and contents are evaluated on a regular
basis.
- The items in the basket are updated and changed periodically to keep up with current
consumer habits in order to best represent the broader economy.
- The products in the basket increases or decreases in price → the overall of the basket
changes.
CALCULATION CAUTIOUS ALERT!!!
• Calculating the cost of the basket of goods in each year still have to
based in the data of the base year (the basket of the base year is the
fixed basket of goods)
• CPI
- Measuring the average change in prices over time that consumers pay for a basket of
goods and services.
- Changes in CPI are used to assess price changes associated with the cost of living.
- Evaluating the consumers' purchasing power (the purchasing power of a country's unit
of currency).
Exercise 2
Year
Price of
cauliflower
Qty of
cauliflower
Price of
brocolli
Qty of
brocolli
2016
$200
100 heads
$75
50 bunches $50
Price of
carrots
Qty of
carrots
500
2017
$225
75 heads
$120
80 bunches $100
500
It is all about calculating the
amount of goods of services you
can afford after the rise in price (is
your standard of living the same?
Worse-off? Better-off?)
II. Calculate CPI
1. Fix the basket
• Determine which prices are most important to the typical consumer (If consumer buy
something with larger quantity then the price of that good should be given greater
weight in measuring the cost of living).
2. Find the prices
• Find the price of each good and services in the basket at each point in time.
3. Compute the basket's cost
• Calculate the cost of the basket of goods and services at different times
• Only the prices in calculation changes (quantity is fixed) → isolating the effects of price
changes from the effects of any quantity changes that might be occurring at the same
time
4. Choose the base year and compute the index
• The index is always 100 in the base year
5. Compute the inflation
- The core CPI: Calculate the CPI for all goods and services excluding food and energy
(show substantial short-run volatility → reflects ongoing inflation trends)
- PPI measures the cost of a basket of G&S bought by firms (firms eventually on their
costs to consumers in the form of higher consumer prices → PPI are useful to predict
changes in the CPI).
Exercise 3
III. Problems in measuring the cost of living
• Substitution bias
- Substitution effect: decrease in sales for a product that can be attributed to consumers
switching to cheaper alternatives when its price rises.
- Prices do not change proportionately → Consumers buy more of the goods whose prices
have risen less and fallen
→ Assuming the fixed basket of goods = ignoring the possibility of consumer substitution →
overstates the increase in the cost of living
(buyers buying substitutes → lower/constant cost of living but CPI calculates the fixed
basket of goods = consumers buying the same qty as before → overrated)
• Introduction of new goods
- When a new good is introduced → consumers have more variety from which to choose
→ a dollar has increased in value (be able to greater variety) = maintain the current
level of economic well-being
- CPI is based on fixed basket of goods and services (fixed prices/qty) → does not
increase in the value of the dollar (equivalent to a reduction in prices)
- CPI includes the new product in the basket = changes in prices of the basket but does
not includes the reduction in the cost of living with the initial introduction of the new
product is never included → overstating the cost of living
• Unmeasured quality change
- Quality of goods deteriorate but the price remains the same = the value of a dollar falls
(getting a good with lowered quality for the same amount of money)
- Quality of goods rises but the price remains the same = the value of the a dollar rises
(getting good with higher quality with the same amount of money)
- Quality is hard to measure
→ SUBSTRACT FEW FOLLARS TO GET THE TRUE CPI
IV. The GDP Deflator and the consumer index
GDP deflator
(Introduce the new products → same amount but higher standard of living → negative inflation
According to CPI, we pay the same amount of money as before → inflation equals to 0
Introduction of new products → the reduction in purchasing the old products to buy the new
products → lower in cost of living)
The price of the product is higher than the years before in the flow with inflation. However,
looking at the product in detail, there are innovations in services and functions
→ you are actually bettor off (higher standard of living) not worse off (lower standard of living)
→ CPI does not include that → inflation overstates (actually worthy)
d. The information does affect the calculation of inflation: overstating the inflation rate
- The introduction of new flavours → increase the purchasing power because right now with
the same amount of money you can have earn more choices
- CPI does include the new products but it only calculates the fixed basket of goods (the
same quantity as before introducing the new flavour) and does not calculate the change in
quantity of purchasing (the reduction in the cost of the old flavours because consumers will
buy the new one to try the new taste)
- The higher of dollars is neglected in the estmation of inflation (equivalent to the reduction
in prices)
Exercise 5
a.
CPI
Feature
Reflects the price of goods
and services produced
domestically
Reflects the price of goods
and services consumed by
consumers
How various prices are
weighted to yield a single
number for the overall level
of prices (các mức giá khác
nhau quy về thành một mức)
Comparing the price of
currently produced goods and
services to the price of the
same good in the base year
(changes automatically
overtime)
Comparing the price of
fixed basket of goods and
services to the price of the
basket in the base year
(ocassionally changes)
Note: prices changing by varying amounts, the
way we weight the various prices matters for the
overall inflation rate
→ Not the same. Reasons:
- The CPI only computes the fixed basket of goods
- The GDP deflator has changes in goods and services automatically all the time
V. Correcting Economic variables for the effects of inflation
1. Dollar figures from different times
(comparing the value of dollars in the years)
• Case study: regional differences in the cost of living
The case of considering job offers
- Factors effecting:
+ Price of goods (if the prices of goods are high, there will be salary inflation to catch up
with the hike)
+ The transport of services (some regions offer high prices and others offer lower =
consumers fly to cheaper and sellers fly to more expensive. However the transporting
are costly → large price disparities can persist)
→ Choosing which place to work = salaries + cost of living (Housing especially)
2. Indexation
• Indexation means adjusting a price, wage, or value based on the changes in another price
or composite indicator of prices.
(composite index: create a presentation of overall market or sector performance to
conduct investment analyses, measure economic trends, and forecast market activity)
(điều chỉnh giá, tiền lương hoặc giá trị khcs dựa trên những thay đổi của một mức giá
khác hoặc chỉ số tổng hợp của giá cả)
• Adjusting for the effects of inflation, cost of living or input prices over time, prices and
costs in different economic geographic areas.
• Escalate wages in inflationary environment (tưng lương trong môi trường lạm phát, nơi
nếu không thương lượng việc tăng lương thường xuyên sẽ dẫn đến việc cắt giảm lương
thực tế liên tục cho người lao động)
• PURPOSE
- Maintaining a stable real price of a good and servic relative to the purchasing power of a
currency unit
+ A price of asset value is linked to a price level of a basket of goods. Price indexes are
commonly published by government agencies → use in the indexation pf prices, wages,
and transfer payments
+ Use this type of inflation → match an employee's salary increases to the inflation rate
(mitigate the impact of inflation against a worker's standard of living)
- Alleviating the negative effects inflation can have on recipients of transfer paymets and
entitlements
- Maintaining a stable relative price between goods or services
https://www.investopedia.com/terms/i/indexation.asp
3. Real and nominal interest rates
Real interest rate
Nominal interest rate
The interest rate as usually reported
without a correction for the effects of
inflation
The interest rate corrected for the effects of
inflation
→ how fast the purchasing power of your
→ How fast the number of dollars in your
MACROECONOMICS Page 3
Exercise 7
a. 139.8
b. 159.1
c.
d. Rise because to buy a dozen eggs take them less time of working than before.
→ how fast the purchasing power of your
bank account rises over time
→ How fast the number of dollars in your
bank account rises over time
Reflecting the purchasing power value of
the interest paid on an investment or loan
and representing the rate of timepreference of borrower and lender
Can be negative
Cannot be negative
REAL INTEREST RATE = NOMINAL INTEREST RATE - INFLATION RATE
→ Have to consider the effect of inflation on your purchasing power period after period
→ HIGHER THE RATE OF INFLATION, THE SMALLER THE INCREASE IN
PURCHASING POWER
→ DEFLATION = PURCHASING POWER RISES BY MORE THAN THE RATE OF
INTEREST
MACROECONOMICS Page 4
Unemployment
Sunday, March 20, 2022
2:12 PM
I. Identifying unemployment
1. How is unemployment measured?
Employed
Unemployed
Not in labor force
Full-time students,
- Employees, self- Who were not employed,
employed, work as unpaid avalable for work and had tried retirees, homemakers
worker in a family
to find employement for the past
member's business.
4 weeks
- Both full-time and part- Those waiting to be recalled to a
time
job from which the had been laid
off
- Temporily absent from
work because of vacation,
illness…
• Labor force: the total number of workers
• Unemployment rate: the % of labor force that are unemployed
• Labor-force participation rate: the of the adult population participating in the labor force
• Natural unemployment
- The minimum unemployment rate resulting from real or voluntary economic forces
- Representing the number of people unemployed due to the structure of labor force
(structural and frictional) (replaced by tech or those lack of skills)
- Persiting due to the flexibility of the labor market, which allows for workers to flow to
and from companies (sector shifts - they leave their current job for better job option,…)
→ 100% full employment cannot be achieved til the labor market is inflexible (no one
can quit theur job freely)
→ the normal rate of unemployment arount the unemployment fluctuaes.
• Cyclical unemployment
- The impact of economic recession or expansion on the total unemployment rate
- Rising during recessions and fells during economic expansions and is a major focus of
economic policy
- One factor among many contribute to total unemployment
- It is a result of businessess not having enough demand for labor to employ all those who
are looking for work at that point within the business cycle.
→ The deviation of unemployment rate from its natural rate
MACROECONOMICS Page 5
2. Does the unemployment rate measure what we want it to?
- Discoraged workers: who are unemployed and have tried to find a job but ended up
giving up because of unsuccessful search. → do not show on unemployment statistics
- Some reported unemployed but actually not try to find a job (to join financial insurance
for the unemployed or to avoid taxes)
→ USEFUL BUT IMPERFECT MEASURE OF JOBLESSNESS
3. How long are the unemployed without work?
• Most spells of unemployment are short, but most unemployment observed at any given
time in the long term.
4.
•
-
Why are there alwas some people unemployed?
Unemployment rate never falls zero even the market is doing well
Wages balanc the quantity of labor supplied and the quantity of labor demanded.
Reasons
Frictional unmployment: the workers takes time to search for jobs that best suit them
Structural unemployment: number of jobsin the labor market is insufficient to provide a
job for everyone who wants one.
+ Minimum-wage laws
+ Unions
+ Efficiency wages
II. Job search
1. Frictional unemployment is inevitable
- The result of changes in the demand for laboramong different firms
(some firms employ more workers and some firms lays off workers → the laid off
workers find jobs from the employ position of others)
- Changes in the composition of demand among industries or regions are call sectoral
shifts
→ It takes time for workets to search for a job in the new sectors, sector shifts
temporarily causes unemployment.
→ Workers in declining industries are outta work and searching for new jobs
2. Unemployment Insurance
- Designed to offer workers partial protection against job loss (to the unemployed who
were laid off because their previous employers no longer needed their skills)
- Encouraging the unemployed stop looking or jobs → increasing job unemployment
MACROECONOMICS Page 6
- Encouraging the unemployed stop looking or jobs → increasing job unemployment
- There is still the good side of the policy: reducing the income uncertainty that workers
face (giving them time to find the best-suited jobs → increase the working efficiency)
III. Minimum-wage laws (support the sellers of labor)
- Raising the quantity of labor supplied and reducing the quantity of labor demanded
(higher wages → workers have more incentives to enter the market and gain more
benefit while firms cannot endure the cost of labor or have no position left for hiring)
→ SURPLUS OF LABOR
- Minimum-wage laws matter most for least skilled and least experienced members of the
labor force → the unemployed waiting for jobs to open up (limited positions)
(The skilled and experienced worker are not affected by this policy because they are
already have stable positions and salaries)
IV. Unions andcollective bargaining
• A union is a worker association that bargains with emloyers over wages, benefits and
working conditions.
1. The Economics of Unions
• Collective bargaining: the process by which firms and unions agree on the terms of
employment.
• Strike: The organized withdrawal of labor froma firm by a union (refusing to work due to
disagreement)
• Union workers are paid higher than similar workers who do not belong to the unions
Union raises the wage above the E level → the same effect as minimum-wage law
(Workers who remain employed at higher wage = insiders of unions are better off while
thoe who were employed and now unemployed = outsiders are worse off)
• Unions raise wages in one part of the economy → the supply of labor increases in other
of economy
(because of the raising wage, firms in that one part of economy do not hire more workes
→ job searcher in that part of economy have to move from that part of economy to the
part that positions are still available → reducing the wages in the industries that are not
unionized because too much unemployed enter)
→ workers in unions reap the benefit of collective bargaining, while workers not in unions
MACROECONOMICS Page 7
→ workers in unions reap the benefit of collective bargaining, while workers not in unions
bear some of the cost.
• The role of unions in the economy depends in part on the laws that govern union
organiztion and collective bargaining.
→ many laws are designed to encourage the formation of unions.
2. Are unions good or bad for the economy?
- A union may balance the firms' market power and protect the workers from being at
themercy of the firms' owners.
→ right mix of job attributes
→ helping firms keep a happy and produtive workforce
V. Efficiency wages
• Efficiency wages: above-equilibrium wages paid by forms to increase worker prodctivity
Wages above E → firms operate more efficiently → Increasing higher wages for higher
productivity
-
Worker health
Worker turnover
Worker quality
Worker effort
MACROECONOMICS Page 8
Production and Growth
Sunday, April 3, 2022
7:46 PM
I. Productivity: Its role and Determinants
1. Why productivity is so important
• Productivity: the quantity of goods and services produced from each unit of labor input
- Productivity is the key determinant of living standards
- The groeth of productivity is the key determinant of growth in standard of living
→ The larger the quantity of goods and services, the higher the living standard
2. How productivity is determined
→ by many factors
a. Physical capital per worker
• The stock of equipment and structures that are used to produce goods and services
• Capital is an input into the production process that in the past was an output from a
production process
→ Capital of a factor of production to produce all kinds of G&S, including more capital
→ Output and Input
Example: a worker with more sophisticated and specialized tools can produce larger
quantity of products that a worker with only basic tools
b.
•
•
-
Human Capital per Worker
The knowledge and skills that workers acquire via experiences, education and training
Human capital is both an input and output
Output: produced factor of production (from inputs: teachers, classes, books…)
Input: nation's ability to produce
c.
•
•
•
Natural resources
The inputs in the production provided by nature
Two forms: Renewable and Nonrenewable
Differences in natural resources explains some of the differences in standards of living
aroung the world
Example: Kuwait rich because they happen to be on top of the largest pools of oil in the
world
The US → their land is suitable for agriculture
• Unecessary for an economy to be highly productive
d. Technological knowledge
• Society's understanding of the best ways to produce goods and services
(The ability to understand of the function , operation and application of current technology)
• Many forms
- One person uses it, everyone aware of it
- Proprietary: only by the company that discovers it
- Priorietary for a short-time (have the temporary right to produce exclusively
(Human capital nói về khả năng produce của con người còn Tech knowledge nói về sự hiểu biết
của con người về máy móc)
II. Economic Growth and public policy
1. Saving and Investment
• The more capital are produced → produce more goods and services
→ Raising future productivity = invest more in the production of capital (a capital if the
factor of production of the other capital)
MACROECONOMICS Page 9
factor of production of the other capital)
• Trade-off:
- For larger production of capital, the society have to decrease their consumption (devoting
fewer resources to producing G&S for current consumption, consume less and save more
current income)
Example: Instead of invest money in building buildings for people to buy, the government
will use the funds to produce more equipment and facilities to larger production of G&S.
2. Diminishing returns and catch-up effect
a. Diminishing returns
(Saving rate: forgoing some current consumption in favor of increasing the future
consumption)
• Raising the nation's saving rate = fewer resources needed to make consumption G&S →
more resources to make capital goods to support larger production → capital stock
increases and GDP grows
→ Temporary condition
• Diminishing returns: the quantity of inputs increases = decrease in the production of extra
output (Marginal output)
→ higher stock of capital → the benefits from additional capital become smaller over
time = the growth slows down
→ INCREASING TH SAVING RATE CAN LEAD TO SUBSTANTIALLY HIGHER
GROWTH FOR A PERIOD OF SEVERAL DECADES
• The amount of capital of worker already high, additional capital investment has a relatively
small effect on productivity (coordination problems)
b. Catch-up effects
• The property whereby countries that start off poor tend to grow more rapidly than countries
that start off rich → small amount of investment in capital can raise the productivity
substantially
→ POOR COUNTRIES TEND TO GROW FASTER RATE THAN RICH COUNTRIES
3. Investment from Abroad
• Foreign direct investment (FDI): A capital investment that is ownd and operated by a
MACROECONOMICS Page 10
• Foreign direct investment (FDI): A capital investment that is ownd and operated by a
foreign entity
• Foreign portfolio investment: An investment financed with foreign money but domestic by
domestic residents
Example: an American buy stock from a Mexico corp → use the proceeds from the stock
sale to build a new factory
→ The investor take some of the income made by the receiver as profit
• Investment from abroad does not have the same effect on all measures of economic
prosperity
- GDP measures domestically while GNP measures both at home and abroad
→ Foreign investment raises the incomeby less that raises the production (tăng cái
productivity nhưng mà không tăng lương vì nó đã được chia cho investor)
• Investment from abroad is one way for a country to grow
→ increase stock of capital, higher productivity and higher wages
→ learn from developed countries
4.
•
•
•
Education
Opportunity cost: forgo the wags that students can earn from joining the labor workforce
Producing the positive externalities: benefit society more than individuals
Brain drain
5. Health and nutrition
• Healthier workers = more productive → increasing productivity and raising living
standards
• The causal link between health and wealth runs in both directions
• Unhealthy populations → poor country → unhealthy food → unhealthy population → poor
6. Property rights and political stability
• Propety rights: the ability of people to exercise authority over the resources they own
→ the courts discourage theft and ensures buyers and sellers live up to their contracts
• Political stability
• Government confiscates the capital of some business
→ domestic residents have less incentive to save, invest and start new businesses
→ foreigners have less incentive to invest
→ A country with political stability will enjoy higher standard of living
6. Free trade
• Inward-oriented policies : economic independence and self-reliance of developing
countries (imposing high tariffs and restrictions) → making countries worse-off
- Self-producing all capital goods
- Cannot receive th state-of-art equipment from others
• Obstacle: Geography
- Countries with natural seaports find trade easier than countries without this resource
7. Research and development
→ task of government: encouraging researching of technological advance
• Public good: a person discovers an idea → the idea enters the society's pool of knowledge
→ other people can use freely
• Ways of encouraging: subsidy and patent system
• Patent system: giving the inventor the exclusiveright to make the product for a specified
number of years → private good → the inventors gain profit from their outcomes → have
more incentive to produce
MACROECONOMICS Page 11
8. Population growth
• A large population means more workers to produce
• A large population means more peoplr to consume
→ A large population need not mean a higher living standard
→ Both large and small nations are found at all levels of economic development
MACROECONOMICS Page 12
The financial market
Monday, April 4, 2022
9:59 AM
I. Financial markets
II.
•
•
•
•
Stock markets
Bond markets
• Represeting ownership in a firm, a claim to the profits that the firm
makes.
• The sale of stock to raise money = equity finance
• The owner of the stock is part of the owner of the corporation
• If the company is profitable, the stockholders enjoy the benefits of these
profits (bondholders get only the interest of bonds)
• Corporation runs into financial difficulty, the bondholders are paid what
they are due before stockholders receive anything at all
→ Stocks offer the holder higher risk and returns
• Definition: It is a certificate of indebtness that specifies the obligations of
the borrower to the holder of the bond
• Identifying the time at which the loan will be repaid (the date of maturity)
If selling the bonds before the date of matiurity, the bonds are sold at
reduced price
• Identifying the rate of interest that will paid periodically until the loan
matures
→The buyer gives Intel his money in exchange for this promise of
interest and eventual repayment of the amount amount borrowed
(principal)
• A bond's term - the length of time until the bond matures
- Bond never mature: perpetuity (only pay the interest)
- The interest rate on a pond depends partly on its term
- Long-term bonds are riskier than short-term bonds → to compensate the
risk, long-term bonds payer higher interest
• Credit risk - the probability that the borrower will fail to pay some of the
interest or principal
• Default - failure to pay
- The probability of default is high → buyers demand for higher interest
rate to compensate for the risk
- Government bonds are safer = lower interest
- Financially shaky corporations raise money by issueing junk bonds (very
high interest rates)
• Tax treatment - the way the tax laws treat the interest earned on the bond
- The interest on most bonds is taxable income (owners have to pay a
portion of his interest as income taxes
• Government bonds = municipal bonds
- Bond owners are not required to pay taxes
Financial Intermediaries
Definition:
Financial institutions through which savers can indirectly provide funds to borrowers (banks, investment banks…)
Reflecting the role of institutions standing between savers and borrows
Helping create efficient markets and lower cost of doing business
Providing leasing (contractional) or factorng srevices, but do not accept public deposits (higher risk)
Benefits: pooling risk, reducing cost, and providing economies of scale, among others
1. Banks
• A primary job of banks: taking in deposits of savers and use these deposits to make loans to people who want to borrow (borrowers)
→ Banks pay depositers (savers) interest on their deposits and charge borrowers slightly higher interest on their loans (The difference will cover the
banks' costs and returns some profit to the banks' owners → banks receive profit)
• Facilitating purchases of goods and services by allowing people to write checks against their deposits and to access those deposits with debit cards (hỗ
trợ mua sắm bằng cách yêu cầu saver gửi deposit và họ có thể tiêu bằng thẻ tín dụng)
→ medium of exchange = instrument or system used to facilitate the sale, purchase or trad eof goods between parties
2.
a.
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•
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Mutual funds
Definition:
institution selling shares to the public (investors) and uses the proceeds to buy a portfolio of stocks and bonds (danh muc dau tu)
Made up of a pool of money collected from many investors to invest in securities like stock, bonds and other assets
Operated by money managers → allocating the fund's assets and attempt to produce capital gains or income for the fund's investors
A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus
The primary advantage: allowing people with small amounts of money to diversify their holdings
The value of mutual fund company depends on the performance of the securities it decides to buy
People who have diverse portfolio of stocks and bonds face less risk because they only have small stake in each company
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b. How mutual funds work
• A mutual fund is both an investment and actual company
→ A mutual fund investor is buying partial ownership of the muatual fund company and its assets
• Investors earn a reaturn in three ways
- Dividends on stocks and interest on bonds held in the fund's portfolio
→ Paid nearly all of the income the fund receives over the year to fund owners in the form of distribution
→ Choosing either to receive a check for distributions or reinvest the earnings and get more shares
- The fund has the increase in price = the fund has capital gains (the increase value of capital assets)
→ Most funds pass these gains to the investors in distribution
- Fund holdings (contents in portfolio) increase in price but are not sold to the fund manager → the fund's shares increase in price → selling your mutual
fund shares for a profit
III. Saving and Investment in the National Income accounts (295)
1. Identities
• Nationak saving: The total income in the economy that remains after paying for consumption and government purchases
• Private saving: the income that householdshave left after paying for taxes and consumption
• Public saving: the tax revenue that the government has left after paying for its spending (the government receive tax and spend those amount of tax on
gods and services)
- Budget surplus: the government receive more money than it spends →
- Budget deficit: the government spend more than the tax money it receives →
→S=I
2. The emaning of saving and investment
• Although S = I shows that saving = investment, this does not have to be true for every individual household or firm\
IV.
1.
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The makret for Loanable Funds
The supply and demand for loanable funds
The supply:
coming from people who have extra in their income and want to save and lend out
The lending can occur directly or indirectly
→ Saving is the supply of loanble funds
• The demand
- Coming from households and firms wishing to borrow to make investments
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- Coming from households and firms wishing to borrow to make investments
→ Investment if the demand
• The price of a loan = Interest rate
→ Representing the amount that borrowers pay for loans and the amount lenders/savers receive for their saving
• The E of lendings and borrowings
- Interest rate lower than the E → S < D → lenders charge higher interest rate
- Interest rate higher than E → S > D → lenders charge lower interest rate
• The supply and demand for lonable funds depend on real interest rate
→ THE FINANCIAL MARKETS WORK MUCH LIKE THE MARKETS IN THE ECONOMY
V.
1.
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•
•
Measuring the time value of money
The present value
The amount of money today is worth more than the same amount in the future
The amount of money today that would be needed, using prevailing interest rates, ti produce a given future amount of money
Calculating the PV of a FV
2.
•
•
•
Future value
The amount of money in the future that an amount of money today will yied, given prevailing interest rates
Estimating how much an investment made today will be worth in the future
Calculating future value
→ The higher the interest rate, the more you can depositing your money in a bank
3. Example
• The PV of $200 million =
→ Calculating the PV of each years → the PV of the 20 years
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